You have just learned that you are a beneficiary in the will of your late Aunt Susan. The...

Question:

You have just learned that you are a beneficiary in the will of your late Aunt Susan. The executrix of her estate has given you three options as to how you may receive your inheritance. You must use spreadsheet functions or a financial calculator to solve this question.

Required:

1-a. Calculate the present value for the following assuming that the money can be invested at 13% percent. (Round final answers to the nearest dollar amount.)

Present Value _____
  • a. You may receive $74,000 immediately. $ _____
  • b. You may receive $97,000 at the end of fifteen years. $ _____
  • c. You may receive $31,000 at the end of each year for fifteen years (a total of $465,000). $ _____

1-b. If you can invest money at a 13% return, which option would you prefer?

  • Option a
  • Option b
  • Option c

Present value method :

Present value method is used to evaluate the different level of investment projects. With the help of the present value method, we can find out the future value of present cash outflow and it is also helpful in decision making.

Answer and Explanation:

Answer 1-a

Present value = Present value factor * Investment amount

Option A

Investment = $74,000

PVF = 1

Present value = 1 * 74,000 = 74,000

Option B

Investment = $ 97,000

PVF after 15 year = 0.15989

Present value factor = PVF * Investment

Present value = 0.15989 * 97,000 =15,509.40

Option C

Investment = $ 31,000

Cumulative PVF = 6.462378

Present value factor = PVF * Investment

Present value = 6.462378 * $ 31,000 = $ 200,333

Answer 1-b

Assuming the investment amount is same for all.

Option C should be more preferable as it is providing more amount of cash flow on a regular interval.


Learn more about this topic:

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How to Calculate the Present Value of an Annuity

from Business 110: Business Math

Chapter 8 / Lesson 3
11K

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